Consider the Home country with the demand curve for apples given by P = 20 – 2Q.

Question

Consider the Home country with the demand curve for apples given by
P = 20 – 2Q.
There is only one firm that produces apples at the marginal cost of $4 per kilo.
(a) Assume the Home country does not trade with the rest of the world. What are the no-trade
monopoly equilibrium price and quantity of apples produced at Home?
Now assume that Home has started trading with the Foreign country, which is exactly the same:
it has the same demand curve and there is only one firm there that also produces apples at the
marginal cost of $4 per kilo. Also, each firm in every country has to pay a transportation cost of
$1 per kilo to deliver its apples to the market abroad.
(b) In the trade equilibrium, calculate the prices in both countries.
(c) How much each firm sells in the local market and exports abroad?
(d) Using your answers above, show that reciprocal dumping is occurring

Explanation / Answer

I can answer (b) for you:

dC/dQ = 4
=> C = 4Q
Profit = PQ - C
= 20Q -2Q^2 - 4Q
for maximum profit d/dQ = 20-4Q-4 = 0 => Q =4
=> P = 20-4x4 = 4
In 2nd country,
dC/dQ = 4+1 = 5
=> C = 5Q
Profit = PQ - C
= 20Q -2Q^2 - 5Q
for maximum profit d/dQ = 20-4Q-5 = 0 => Q =3.75

=> P = 20-4x3.75 =15

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